Thursday, January 2, 2014

InterOil (IOC) - Volatility Dips After Stock Cataclysm; Skew Divergence Is Curious

IOC is trading $50.40, down 2.1% with IV30™ down 1.9%. The LIVEVOL® Pro Summary is included below.

Provided by Livevol

InterOil Corporation (InterOil) is an integrated energy company operating in Papua New Guinea and the surrounding Southwest Pacific region. InterOil operates in four segments: upstream, midstream, downstream and corporate. The upstream segment explores, appraises and develops crude oil and natural gas structures in Papua New Guinea.

I'm still looking at some the these volatilities in specific names and finding them remarkably low. I found IOC stock using a real-time custom scan that hunts for low vols.  There's also a skew story developing here which is of interest.

Custom Scan Details
Stock Price GTE $7
IV30™ - HV20™ LTE -8 GTE -40
HV180™ - IV30™ GTE 7
Average Option Volume GTE 1,200
Industry != Bio-tech
Days After Earnings GTE 32

The goal with this scan is to identify short-term implied vol (IV30™) that is depressed both to the recent stock movement (HV20™) and the long term trend in stock movement (HV180™). I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not purchasing depressed IV30™ relative to HV20™ simply because of a large earnings move.

The IOC Charts Tab (two-years) is included below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

Provided by Livevol

On the stock side we can see a very bumpy ride in the price, most recently a huge gap down from $88.63 (12-5-2013) to $55.50 the next day or a 37.4% one day drop.  Here's the news surrounding that move:

InterOil plunged 37% after the oil and gas exploration and production company finally ended years of struggle by accepting a deal with France's Total (NYSE: TOT ) to help it develop its Papua New Guinea properties. The deal involves Total buying a majority stake in the oil and gas fields for $613 million up front, and Total will proceed with helping to build and operate a liquefied natural gas project in order to export natural gas from the island nation to energy-hungry countries across the Asia-Pacific region. InterOil could earn $212 million in milestone payments and also variable amounts if natural gas production exceeds certain thresholds, but investors clearly wanted more despite the lack of leverage InterOil has after failing to close a deal with ExxonMobil despite extended negotiation.

Source: The Motley Fool via Yahoo! Finance Why InterOil, Ulta Salon, and Barnes & Noble Plunged Today, written by Dan Caplinger.

Now let's turn to the two-year IV30™ chart in isolation, below.

Provided by Livevol

We can see the vol drop off of that stock moving news, which is actually normal.  Once news is out, the risk in the shares does deflate. On 12-6-2013 IV30™ dropped from 87.16% to 68.80%.  OK, fine...

The next day the implied dipped further into the 63% range, then climbed back to 69.25% as the stock began to find an equilibrium (or so it seemed).  In my mind that means ~69% vol is fair for this firm (earnings are in the Mar expiry, so that event is not relevant to this discussion).

Now look at that IV30™ chart and see how it has been dipping hard even after that "equilibrium."  As of today the IV30™ sits at 44.88%, fully 35% less than the "equilibrium" level.  Hmm...

There's even more going on with the vol.  Check out the Skew Tab, below.

Provided by Livevol

Look how different the shapes are for Jan options and Feb options.  Jan shows a parabolic skew, reflecting both upside and downside risk greater than the at-the-money (ATM) price.  That skew shape is in fact "irregular."

To read more about skew, what is and why it exists you can click the title below:
Understanding Option Skew -- What it is and Why it Exists.

If we than look to Feb skew, we see that "normal" shape, where the out-of-the-money (OTM) puts are priced to higher vol than the ATM options and the OTM calls.  So the question is... what's going on in Jan?  Why is the overall vol so low yet the wings (the OTM options) priced so high?

Finally, let's look to the Options Tab (below).

Provided by Livevol

Across the top we can see Jan vol is priced to 46.07% while Feb is priced to 45.59%.  But look at the vol of the OTM options in Jan.  While the $50 strike in Jan is priced to ~46%, the $60 strike is priced to 53.60% and the $40 strike is priced to 70.81%.

Let's watch IOC... This one may have legs.

This is trade analysis, not a recommendation.

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